Spain: Mexico is watching

As the financial crisis in Spain heightens and pressure mounts on its banks to increase provisions to cover losses from real-estate exposure, recent disinvesting moves by Spain’s two largest financial entities in Latin America begin to cause concern in the region.

This is particularly the case in Mexico, a country whose top financial entities, BBVA-Bancomer (BBVA.MC) and Banco Santander (SAN.MC), are based in Madrid.

Rumors of BBVA-Bancomer’s plans to sell its 55 billion euro Latin American pension businesses began to circulate late last year when it became known that Goldman Sachs had been appointed to represent the Spanish banking giant in the search for buyers.

Last week, the bank issued a statement explaining that its decision to let go of this segment of its business in Mexico, Chile, Colombia, and Peru responded only to “strategic” criteria, and that the move was not related to the economic woes at home.

However, BBVA further stated that, while profitable, the pension fund area’s relationship with the group’s core business was “weak” – a message that doesn’t sound persuasive among Mexican analysts keeping track of foreign-owned banks.

BBVA-Bancomer already caught analysts attention two years ago when it became known that the bank had repatriated over one billion dollars to pay dividends in Spain in November of 2009, reviving fears among analysts about the dangers of the nation’s banking system decisions being taken abroad.

On its part, Spain’s largest bank, Santander, has sold its subsidiaries Banco Santander Colombia and Santander Investment Trust Colombia to Chilean group Corpbanca for 1.225 billion. Santander has stated that the profits will be in fact used to “strengthen” its balance sheet.

Guillermo Babatz Torres, president of Mexico´s National Banking Commission (Comisión Nacional Bancaria y de Valores, or CNBV), sent a subtle message to foreign-owned banks in Mexico in his speech at the bank convention in Acapulco last month: “The CNBV will continue implementing policies of regulation and supervision to ensure the smooth running of our system, regardless of what happens in the financial systems of the host countries where Mexican banks are based.”

The peso under pressure

Mexico’s international reserves are strong (currently at 155 billion dollars) and there is a constant flow of reassuring official statements regarding the economy’s readiness to deal with the troubles in Europe, as well as calls to the banks’ proper capitalization.

However, the peso (USD/MXN) dropped over 9 percent in May and the country’s central bank has had to intervene in the foreign-exchange market to pull the breaks on the currency’s depreciation.

The CNBV has said that it is in direct contact with the banks in Madrid, as well as with Spain’s central bank, and that it is making sure all transactions between the banks and its Mexican subsidiaries are conducted in pesos.

In addition, Mexico will hold presidential elections next month, and a poll published by newspaper Reforma last week sees leftist presidential candidate Andres Manuel Lopez Obrador closing in on front-runner Enrique Peña Nieto – a narrowing gap that some analysts believe might put additional pressure on the peso.

Ultimately, holding the line on the country’s financial system is crucial, for Mexico stands as one of Latin American countries most exposed to Spain’s banking crisis.

Last Wednesday, at BBVA-Bancomer’s 80th anniversary celebration in Mexico City, the group’s CEO Francisco González seems to have acknowledged the CNBV’s message when he said: “We are a long time investor […] our model is decentralized […]. Mexican regulation is clear and imposes strict limits on lending [between parent banks and their subsidiaries] to prevent capital shortages [in the Mexican offshoot].”

While Mexico’s 1994 financial crisis remains fresh in the country’s memory, Mexicans are right to keep an attentive eye on the banking crisis unraveling in Spain.